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Microeconomics Q1

Let a consumer's choice of games be between "Nintendo" (N) and "PlayStation" (P), and the quantities she chooses are qN and qP respectively. The price of the two goods are pN and pP respectively. The consumer has an income of w. Answer the following questions. (a) Let the consumer's utility be of the Cobb-Douglas variety, that is U= xNaxP1a, where 0a1. Depict on a well labeled diagram the consumer's choice, and explain the equilibrium choice, making sure you write down the equation that describes it. (5 Marks) (b) Depict on a new well labeled diagram the effect of a price decrease in "PlayStation" games, assuming that "PlayStation" games are Normal goods, making sure you decompose the change into its components, in other words its (i) substitution, and (ii) income effects. Explain your diagram carefully. (5 Marks) (c) Explain how such a Cobb-Douglas utility function and their associated indifference curves depicts this consumer as Risk Averse. (5 Marks) (d) How would your answer to part (b) change, if instead the consumer's preferences is characterized by a Leontieff utility function. In other words, N and P are perfect complements to the consumer. Depict your answer on a well labeled diagram. (5 Marks) Let a consumer's choice of games be between "Nintendo" (N) and "PlayStation" (P), and the quantities she chooses are qN and qP respectively. The price of the two goods are pN and pP respectively. The consumer has an income of w. Answer the following questions. (a) Let the consumer's utility be of the Cobb-Douglas variety, that is U= xNaxP1a, where 0a1. Depict on a well labeled diagram the consumer's choice, and explain the equilibrium choice, making sure you write down the equation that describes it. (5 Marks) (b) Depict on a new well labeled diagram the effect of a price decrease in "PlayStation" games, assuming that "PlayStation" games are Normal goods, making sure you decompose the change into its components, in other words its (i) substitution, and (ii) income effects. Explain your diagram carefully. (5 Marks) (c) Explain how such a Cobb-Douglas utility function and their associated indifference curves depicts this consumer as Risk Averse. (5 Marks) (d) How would your answer to part (b) change, if instead the consumer's preferences is characterized by a Leontieff utility function. In other words, N and P are perfect complements to the consumer. Depict your answer on a well labeled diagram

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